A recent national study offers compelling evidence that generous unemployment insurance benefits during the COVID-19 pandemic significantly reduced reliance on high-cost credit. Conducted by Rachel Dwyer and Stephanie Moulton of Ohio State University and published in Nature Human Behaviour, the research demonstrated that lower-income individuals in states with more generous benefits were much less likely to acquire new credit cards, personal finance loans, payday loans or other alternative financial service offerings. The findings underscore the critical role that unemployment insurance can serve in preventing low-income Americans from falling further into economic hardship. Moulton explained that providing more generous benefits helps avoid types of debt that are costly to individuals and society at large, a crucial insight for policymakers, economists, researchers, and individuals interested in social welfare and economic policies.

The study’s robust methodology included a large sample size of 2.3 million Americans, monitored from late 2019 through the end of 2021 using data from Experian. By analyzing the variability in unemployment insurance benefits across states and the timing of benefit expansions and contractions, the researchers could assess how these factors influenced the avoidance of costly debt. Dwyer emphasized the importance of unemployment insurance as a critical safety net component, affecting many people during the economic downturn induced by the pandemic.

Their analysis showed that enhanced unemployment benefits led to decreased usage of costly credit, particularly among the lowest-income households. For instance, the probability of these consumers taking out new credit cards was 9.7% lower in states where benefits were most generous. This trend was even more pronounced with alternative financial service loans, such as payday loans, often outside traditional banking channels and with high interest rates.

Moulton noted the disparity between income groups during the pandemic, explaining that while higher-income households might have used savings or credit cards to manage temporary unemployment, the lowest-income groups often had no such options. With savings or access to traditional credit, these consumers could turn to expensive credit options as a last resort, indicating a significant reliance on less desirable financial solutions when state support was lacking.

The study also explored other consumer behaviours during the recession, like spending on existing credit cards and applying for loans, regardless of approval status. Dwyer’s team found that lower-income consumers consistently fared better in states with generous benefits, suggesting that state support played a crucial role in economic stability for these individuals. These findings also contribute to the broader debate about the efficacy and return on investment of government programs like unemployment insurance, indicating that such programs not only assist individuals directly but also prevent broader economic repercussions like increased credit costs and potential bankruptcies.

The study underscores the potential societal gains from such government interventions by highlighting the link between state-provided benefits and reduced high-cost borrowing. Moulton concluded that preventing high-interest borrowing not only helps individuals avoid financial pitfalls but also mitigates costs that society might eventually bear, demonstrating the ripple effects of economic policies on the broader financial ecosystem.

More information: Lawrence M. Berger et al, Inequality in high-cost borrowing and unemployment insurance generosity in US states during the COVID-19 pandemic, Nature Human Behaviour. DOI: 10.1038/s41562-024-01922-8

Journal information: Nature Human Behaviour Provided by The Ohio State University